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Energy

Published on 17 January 2018

In this chapter of our Annual Insurance Review 2018, we look at the main developments in 2017 and expected issues in 2018 in the energy sector.

Key developments in 2017

Major hurricanes (Harvey, Irma and Maria) once again swept through the Gulf of Mexico and the Caribbean in August and September 2017, causing widespread damage to the community as a whole. But hurricane Harvey also had a significant impact on oil facilities in the Houston area.

Given their locations, it might be considered unsurprising that these facilities were affected. Perhaps more surprising was the extent to which damage was caused not by the high winds, but as a result of flooding.

Hurricane Harvey illustrates the extent to which oil refineries in sensitive locations are vulnerable to floods,and the need for risk managers and insurers to consider whether facilities have adequate protection and measures in place to address specifically the risk from flood. Such measures could, in appropriate cases,include the construction of flood walls of the kind used to combat the over spill of water (from river or reservoir) close to source.

Again, as might be expected, production at the affected facilities resulted in a drop in supplies of gasoline and other petroleum products, and as much as a quarter of US refining activity was shut down for a period.It might also have been expected that such a significant loss of capacity would have an impact on the price of crude oil. However, while there was a drop in in the price of crude oil for a limited time, the price recovered fairly rapidly.

There are several reasons why the impact was limited, but hurricane Harvey may also be seen as illustrating the extent to which the exploitation of shale in the US has transformed the landscape for oil and reduced exposure to traditional vulnerabilities.

What to look out for in 2018

Cyber exposure is currently much talked about as high-profile cyber attacks continue and awareness of the risk rises.

For insurers, cyber gives rise both to risks of exposures that insurers did not anticipate facing and to opportunities when insureds will increasingly be seeking to buy suitable cover.

Cyber raises particular issues in the energy field as a result of the increasing digitalisation of facilities. Cyber also poses not only obvious and substantial financial risks, including business interruption, but also the possibility of significant physical damage.

Cyber risks may be seen as a concern where policies are liable to be found to respond in the absence of the express provision of cover and where there will not have been any corresponding premium (so-called silent cyber). Such exposures can also give rise to regulatory issues.

Historically, insurers in the energy sector have not sought to provide cyber cover as a default and have typically expressly excluded cover. If insurers do not wish to provide cover for cyber risks, it is clearly important to ensure the policy provisions are sufficiently fit for this purpose. It cannot be assumed that wordings that have been used in the past achieve this end.

An increasingly digitalised world also offers new opportunities for providing cover for what could be substantial exposures. The digitalisation of production facilities is only likely to increase, both as a result of further developments in technologies and as a means of reducing costs. Assessing the exposure to cyber risks requires gaining an understanding of the new technologies and the new processes they will produce.